(Bloomberg) -- Chinese equities overcame an early bout of volatility to advance on the first day of the new year as optimism grew that Covid infections may have peaked in some parts of the nation.

The Hang Seng China Enterprises Index, which tracks Chinese firms listed in Hong Kong, closed 1.9% higher in its best first-day trading performance in any year since 2018. On the mainland, the benchmark CSI 300 Index climbed 0.4%.

After initial jitters that China may struggle to exit its Covid Zero policy, investors are growing increasingly confident that the final outcome will be positive for the economy and corporate earnings. A recovery in subway use in nearly a dozen major cities and the peaking of the virus outbreak in the southern manufacturing hub of Guangzhou are reinforcing these expectations.

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“While it is inevitable to see further surges and more widespread infection at the initial stage of opening, the outlook for the Chinese economy has brightened for 2023,” strategists at Saxo Capital Markets wrote in a note. “In addition to the reopening, China has intensified its effort to support the distressed property sector and given property developers access to credit and equity financing which had been denied to them for the most part of 2022.”

Bets on China’s reopening saw the Hang Seng gauge surge 36% in the last two months, beating a broader Asian index by more than 20 percentage points. The HSCEI measure is expected to rebound in 2023 after capping a third straight year of declines — a record losing run since its inception in 1994.

Mainland investors bought a net HK$4.2 billion ($537 million) of Hong Kong stocks via the trading links on Tuesday, the biggest one-day inflow since Dec. 12, according to data compiled by Bloomberg.

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Signs of a further easing in China-US tensions also helped underpin gains in equities. New Chinese Foreign Minister Qin Gang offered effusive praise of Americans after stepping down as his nation’s top envoy to Washington, saying in a tweet that he had “been deeply impressed by so many hard-working, friendly and talented American people that I met.”

Still, volatility is expected to remain high, with a raft of recent reports highlighting the economic toll from the surge in virus cases. With stocks having rallied for two months on reopening bets, traders will look for fresh catalysts, especially as analysts expect the economy to rebound only later in the year.

Official data over the weekend showed the decline in manufacturing worsened last month, while activity in the services sector plunged the most since February 2020. The number of domestic trips during the New Year’s holiday only rose 0.44% from a year earlier, government figures showed.

The CSI 300 has been largely rangebound after surging almost 10% in November as investors booked profits amid fears about the spike in infections following the dismantling of China’s Covid Zero policy.

“The latest PMI readings suggest that China’s reopening is not going to be smooth and that economic activity may not pick up until the winter Covid wave subsides,” said Marvin Chen, an analyst at Bloomberg Intelligence. “There may be some short term pain until activity normalizes.” 

--With assistance from Ishika Mookerjee.

(Updates with closing prices in second paragraph and adds stock flows in sixth paragraph)

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